Business context and reporting period
Starbucks Corporation’s unaudited Form 10-Q covers the quarter ended June 26, 2016, and the first three quarters of fiscal 2016. Fiscal 2016 includes a 53rd week in the fourth quarter. Unless noted, amounts are in U.S. dollars.
Financial performance and position
| Metric | Quarter | First three quarters |
|---|---|---|
| Revenue | $5.238 billion, up 7.3% | $15.605 billion, up 9.5% |
| Operating income | $1.022 billion, up 8.9% | $2.945 billion, up 11.9% |
| Operating margin | 19.5%, up 30 basis points | 18.9%, up 40 basis points |
| Net earnings attributable to Starbucks | $754 million, up 20.3% | $2.017 billion, down 4.2% |
| Diluted EPS | $0.51, versus $0.41 | $1.35, versus $1.39 |
| Operating cash flow | Not separately provided | $3.267 billion, versus $2.779 billion |
| Capital expenditures | Not separately provided | $1.030 billion |
| Cash and investments | $3.136 billion at June 26, 2016 | |
| Long-term debt | $3.602 billion face value; $400 million current portion |
Quarterly revenue growth reflected comparable-store sales growth of 4%, 1,876 net new stores over the prior 12 months, and increased licensed-store and product sales. Quarterly diluted EPS rose 24% from the prior-year $0.41. Cost of sales as a share of revenue improved, while store operating expense rose as a share of revenue, reflecting partner and digital investments. Cash and cash equivalents were $2.142 billion; the company also had $174.5 million in short-term and $819.5 million in long-term investments. A simple operating-cash-flow less capital-expenditure calculation implies approximately $2.237 billion for the first three quarters.
Material changes versus comparable periods
- Year-to-date net earnings and diluted EPS declined despite higher revenue and operating income, principally because the prior-year period included a $390.6 million pre-tax gain from remeasuring Starbucks Japan upon acquisition. That gain contributed approximately $0.26 to fiscal 2015 full-year EPS.
- China/Asia Pacific quarterly revenue increased 18% and operating margin expanded to 23.8%; EMEA revenue declined 7% and operating margin fell to 10.9%. Channel Development operating margin increased to 42.6% from 35.5%.
- Starbucks sold its Germany company-operated retail operations in the quarter, converting the market to fully licensed operations. The sale generated a $30.1 million pre-tax gain. Share repurchases totaled $1.590 billion and cash dividends paid were $885 million in the first three quarters, compared with $921 million and $720 million, respectively, in the prior-year period.
- Debt increased from $2.348 billion at fiscal 2015 year-end after issuance of $1.25 billion in 2021 and 2026 senior notes during fiscal 2016. The notes included $500 million of 2.450% notes due 2026 and an additional $250 million of 2.100% notes due 2021.
Outlook, commentary, and risks
Management forecast fiscal 2016 revenue growth of approximately 10%, with the 53rd week adding a further 2% to the growth rate; global comparable-store sales in the mid-single digits; and approximately 1,900 net new stores. Consolidated operating margin was expected to increase slightly and full-year EPS was forecast at $1.88–$1.89. Management expected the extra week to contribute approximately $0.06 to fourth-quarter EPS. Fiscal 2016 capital expenditures were expected to be approximately $1.4 billion.
Management cited sales leverage and lower coffee costs as margin benefits, partially offset by investments in employee wages and benefits, digital platforms, mobile and loyalty programs. EMEA’s fiscal 2016 operating margin was expected to be flat year over year amid challenging consumer, economic, and geopolitical conditions. Management anticipated continued China/Asia Pacific growth and strong Channel Development margin expansion.
Key exposures include coffee, dairy, and other commodity prices and availability; foreign currency movements; competition and consumer acceptance; information-technology failures or breaches; food safety incidents; execution and integration risks; and legal proceedings. The company said it had no material changes to previously disclosed risk factors, no legal proceeding it believed would materially adversely affect its financial position, results, or cash flows, and effective disclosure controls. It was in compliance with debt covenants; no commercial paper was outstanding, and $0.1 million was drawn on its $1.5 billion revolving credit facility. Approximately $1.5 billion of cash and investments were held in foreign subsidiaries; repatriation could result in material additional U.S. taxes.
Important facts for investors to verify
- Whether comparable-store sales, new-store openings, and partner and digital investments deliver the forecast revenue and margin performance.
- How much of year-to-date earnings comparisons reflects the absence of the prior-year Starbucks Japan remeasurement gain, and the effect of the Germany sale gain and other tax benefits on current-period results.
- Cash generation and capital allocation, including the planned $1.4 billion fiscal-year capital expenditures, dividends, and continued share repurchases.
- Debt maturity and liquidity: $400 million of notes mature in fiscal 2017; review the new borrowing, interest costs, credit-facility availability, and covenant compliance.
- Exposure to commodity costs, foreign exchange, EMEA trading conditions, and potential tax costs if foreign earnings are repatriated.